a
crash course in the evolution of business modelsfind
the bottleneck, and own it

There’s
no shortage of predictions about how the Internet will soon realign,
redefine, disintermediate and even eliminate certain industries. “In
most cases it will be much more evil than that,” says Jeffrey
Sampler, Associate
Professor of Information Management & Strategy at the London
Business School.
“For most companies, the Internet is the slow erosion and the death
of a business model.”At this Morino Institute Netpreneur.org Coffee & DoughNets
meeting held October 18, 2000, he took the audience through a quick
history of the effects of technology on business to prove that finding
your real (not imagined) competitive advantage is the key to
entrepreneurial success. It’s why investor and entrepreneur Mario
Morino advises in his wrap-up, “Clearly articulate your business
model and show a compelling understanding of how that model responds
to change. That will go a long way in helping investors and others
have great confidence in your approach.”

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Good
morning.On behalf of the Netpreneur.org
team and Morino Institute,
welcome to Coffee & DoughNets.Thanks for coming out at this very early hour.Now we Virginians know how the Marylanders feel when we do
these events across the Potomac.

If you picked up the December 7, 1998, issue of Fortune, you would
have seen an article entitled “The
E-Corporation,” which was how the editors described the new
kinds of organizations popping up everywhere¾boy,
it sure seems a lot longer than two years since the “e-“ thing was
coined, but I guess we're in Internet time.The article started with these lines: "Somewhere out there
is a bullet with your company's name on it.Somewhere out there is a competitor unborn and unknown that
will render your business model obsolete."It went on to describe how competition is not between products,
but between business models.

The co-author of that article is Jeff
Sampler, and we're delighted to have him with us today to help us
solve the riddles of competition in the New Economy.

Jeff will spend the first segment with you this morning, then
we'll open the floor to your questions with our esteemed counselor, Andrew
Sherman, acting as moderator.Last, but not least, our own Mario
Morino will give us a quick wrap, and we'll have you out of here
and back to building your companies.Before we begin, however, I'd like to acknowledge the local
alumni chapter of the London Business
School. We have them to thank for getting Jeff here today.

jeffrey sampler: 150 years
of competition in 45 minutes

Well,
I’ve got a couple of strikes against me this morning.First, I have this digitally-connected whiteboard that you see,
so clearly I don't know how to use PowerPoint and computers, right?I probably don't even own
a computer, you're thinking at this stage.Actually, I do, but I have done an analysis of all great
speeches back from Cicero to Lincoln to Churchill, and I found out
that none of them used PowerPoint.I've decided that if they can do without it, so can I.Let's see how it works.The
other reason I don't use PowerPoint is because, as an American living
in Europe, I have no idea how to spell anymore.My American-spelling brain and European software don't work
together.I've been living in Europe for eight years where they also
pronounce things differently there.They throw in extra syllables, like saying “al-you-min-ee-um,” instead
of “aluminum.”I
don't know why they do that, but they do.

That was the warm-up introduction to make sure you're awake.What I'm going to talk about this morning is the value chain
and competitive advantage.Let
me be very clear what today will not
be.I will not talk about
the future.Number one, I
don't understand it; number two, even if I did, I wouldn't tell you.It's worth far too much money.

It's a simple fact that you can get degrees in futurology.There are people doing 500-year deltas¾Godspeed.It's a good business model to get money today for predictions
that won't come through until your great-grandchildren are around,
right?The checks have
been long cashed and spent by then, so it's a good business model.I can't do that; I just don't understand the future.However, with traditional academic flair, you can see where the
future's going by looking at the past.What I'm going to do this morning is summarize 150 years of
competition in 45 minutes.I hope.There
will be some time compression and hopefully some insights.You'll tell me later whether that happens or not.

what did you do in the industrial revolution,
daddy?

How
many times do you hear the word “scalability” about a high tech
business model today?

Audience
Member:Lots!

Okay,
there's a quantitative man.Lots.Do you want to define lots?

Audience
Member:All the time, minus one.

I
like that.“All the time minus one.”That's impressive.We
know that it is part of society when we see it's part of Hewlett-Packard
commercials, right?Kids
are doing show and tell and talking about the “scalability” of
their ideas.

Why is scalability so sexy to talk about?I mean, since it's being talked about all the time minus one.Let's assume there's some logic to this madness.Why is scalability talked about all the time minus one?

Audience
Member:Leverage.

Leverage.Okay, let's define leverage.What's unique about leverage?

Audience
Member:Lowest per unit cost for whatever you're selling.

“Lowest
per unit cost for whatever I'm selling.”We're starting to get closer.The interesting thing about leverage, scalability and such is
very simple¾I get more out
than I put in.An economist calls this “fundamental economic growth,”
right?This is how the
pie gets bigger rather than worrying about efficiency and
reallocation.I get more
out than I put in.

The whole idea about scalability and leverage is that I put a
lot of work in, but, at some point, I put in a small delta of work and
I get more out.That's
called “new wealth creation.”It is not an Internet-driven phenomenon; it is a
technology-driven phenomenon.It
is what technology has done throughout history, and what it continues
to do, yet we act as if we have stumbled upon it and think it's some
great insight.It's what
technology has always done.

Let's look at
competition from the Industrial Age forward.If we take a generic
industry value chain,
we
see the three simplified players¾producers,
intermediaries and customers.

Whether
a customer is a business or a consumer, it doesn’t matter right?Looking at those three players, what happened during the
Industrial Revolution is very, very simple.Technology
was introduced, where?At
the point of production.We
had the looming machine, the steam engine and so on.We had the harnessing and leverage of physical labor.If you don't think that this was a big deal, go look at
England.Go to places
called Bradford and Sheffield.They
aren't exactly on the tourist circuit, but, if you go there, you'll
see the heart of the steel industry and the looming industry.You’ll also see some deserted factories today, and you’ll
see how people lived.You'll
see a transition from tiny terraced housing, little cottages next to
each other, to magnificent stand-alone mansions.You’ll see the rise of the middle class and fundamental
wealth creation.Lester
Thurow, an economist at MIT, documented in his last book, The
Wealth Pyramid, that there are only two times in the history of
the world when billionaires¾that's
billionaires with a B¾have been created en masse: the Industrial
Revolution and today.Clearly,
something must be interesting if there is that much new wealth
creation occurring.

In the Industrial Revolution it was very simple.They had economies of scale and scope¾that's how an academic talks about leverage and
scalability¾but
these economies of scale and scope were all around the act of
production.Manufacturers
made the lion's share of the profits across the entire value chain.Why did they make all the money?Because it was the only point where there was leverage
throughout the entire value chain, so they made a ton of money.

What happened after the Industrial Revolution’s introduction
of technology?Basically,
three nations became the dominant economic powers of the world: the
UK, Germany and the US.They
took this technology, adopted it more quickly than other nations,
applied it to different industries¾industry
after industry after
industry¾and
they made a lot of money doing that for roughly 100 years.It was a very good game plan and it worked.

lawn sprinklers, pad thai and other distribution
problems

What happened again in the 1970s and 1980s?We had technology introduced again, this time at the
intermediary level, and this time it was information technology (IT).Why did we have the rise of the category-killer retail store
in about the span of a decade?Companies
like Wal-Mart, Toys-R-Us, Home Depot, Circuit City, Best Buy, on and
on and on.Did God wake
up one day and say, “Let there be big stores?”What technologies enabled the rise of the category-killer
retail store?

Audience
Member:EDI (Electronic Data Interchange).

Audience
Member:Cars.

Okay.Clearly there had to be cars and roads and stuff like that to
make that model work, so I'll buy that externality, but, particularly
around IT, there are three simple things: scanner data, EDI and
affordable mainframe computers.

Do you imagine that Wal-Mart could carry the numbers of items
that it does at the price and inventory levels that they do and at the
stock outage levels they do, if it weren't for EDI, scanner data and
mainframe computers?No
way. Wal-Mart is the world's largest purchaser of mainframe computers.

Let's assume that those mainframes are part of a productive
business strategy, not just a back-up heating system.They have made a ton of money by taking a fragmented industry
and consolidating it through the powers of technology.As a result, they could become much bigger.

It's happened not just in retail, but in many industries, such
as financial services.How
many companies refer to themselves as “financial supermarkets”
today?They even use the
same metaphors, right?You get 600 types of mutual funds, 200 different type of
credit cards, put them under one roof and sort it out.

God bless you, and good luck if you have ever read Federal
Reserve reports.They are
incredibly boring but occasionally insightful.In the early 1990s, the Federal Reserve analysis suggested that
the efficient size of a bank in the US had increased 50% during the
1980s.During a decade,
banks could be 50% bigger and still be more efficient.Why?Because of
the introduction of technology in a very pervasive way into the back
office.All of a sudden,
banks could be bigger and still have economies of scale before the diseconomies
of size set in.As that
information starts to trickle around the Beltway here in Washington,
DC, all of a sudden the commissions and agencies said, “Maybe bigger
banks are better for consumers.”They started to allow bigger mergers, so this has had a
pronounced effect.

Here’s a lateral example, but it drills it home.Has anybody ever been to a restaurant called Tumnut Thai in
Bangkok?It used to be
the world's largest restaurant seating in excess of 5,000 people.Unfortunately, a restaurant that seats in excess of 5,000
people, coupled with a severe Asian recession in the early 1990s is
not a good business model, so they didn't survive the transition.Anyway, you'd see a restaurant spread out over acres and acres.It's not like Oktoberfest in Munich where you put 5,000 people
in an area about the size of this stage; it's a very different concept
of how to allocate people.You
sit on these small islands interconnected with bridges over the water
while native Thai dancers perform.A fascinating restaurant.My wife and I went there eight years ago as part of our
honeymoon.We were
sitting there and a waitress came¾not
to be sexist or anything, but it's always a waitress¾a
petite person who weighs about 50 pounds, carrying a menu that must
weigh 30 pounds.It's
this huge, leather-bound monstrosity that looks like the Manhattan
telephone directory.She
struggles and drops it on your table.You open it up and see a menu with hundreds, if not thousands
of menu items.It has
Thai food, Chinese food, German food, Italian food, American food, on
and on.English cuisine
somehow didn't make it.I
don't know why, but fish-and-chips just didn't make it; still, there
were thousands of menu items.

When you order, the waitress never writes down a thing.This intrigued me, right?I'm a vegetarian, so, if nothing else, I'm worried about this.I watched the waitress very carefully.She takes the order, then goes to a little kiosk in her work
area and types it on a computer.Maybe 20 to 25 minutes later, a person on roller skates
carrying a tray of food delivers it to the waitress who brings it to
your table and bows.That's
the model.

For me, this was one of those great moments of insight.Actually, it was the best and worst of times for me on
different levels.I knew
that something had happened between computer and roller skates that
was very interesting.At
the same time, I was naive enough to ask my wife, “Do you mind if,
on the way out, I talk to the manager to see what's going on?”Keep in mind that this is our honeymoon, not exactly the time
she thought I should be doing field research, so I got the
look.I did not know
what the look meant at that time.Now
I do.It basically meant,
“Please proceed.You're
in as much trouble as you can be, and, by the way, I hope you like the
lobby of the hotel because you're not coming in the room.”Like I said, there were multiple levels of learning going on
that day.

On the way out, I stopped to talk to the manager.I gave him a business card.He was really excited that somebody wants to understand their
system.The first thing
he does is take me into the kitchen where he points out that they have
more than one chef.Thank
you very much for that keen insight, sir.I thought they had one little guy with a ginsu knife on speed
or something.Then he
says, “Look at each chef.”Each
chef has a computer display above his or her work area. As soon as an
order is entered, it gets parsed by the system and appropriate dishes
get sent to chefs specializing in Thai cuisine, chefs specializing in
Italian, German chefs, etc.The
computer breaks up the orders and the chefs make whatever appears on
their screens.The
subtlety of the system is that, since a stir-fried Oriental dish takes
much less time to prepare than a baked lasagna dish, the system does
load balancing.It looks
at the time to prepare a dish and inserts the item in the appropriate
place in the queue.All
the chef does is make the items in whatever order they appear; they're
all tagged, reassembled on a tray and delivered.All food ordering occurs electronically.Can you imagine the waste and spoilage in such a diverse
system?It would make the
economic model absolutely nonviable without the computers.

What we see in that example are the things that technology
always does for us, and yet we're always amazed.Technology always does the same four things: makes something
faster, cheaper, more reliable or solves more complicated problems.Technology always does one or more of those things, and yet
we're always dumbfounded.Faster,
cheaper, more reliably or to solve more complicated problems.

All of a sudden, companies like Wal-Mart are making a lot of
money.Why?Because there's a fundamental power shift from producers to
intermediaries.When
academics say “power shift,” they mean money.That's what I mean,
money.Anybody
who's been in retail knows exactly what happens next.Wal-Mart or whoever starts telling Procter
& Gamble, “Excuse me, let me explain exactly the profit
margin you're going to make on that new detergent.You don't like it?Take
a hike, because I've got 50% of the channel.”

God
forbid, you might want to introduce a new lawn sprinkler into the US.Home Depot has 80% of
that market.There's no way you can introduce a lawn sprinkler in the US
unless you have their approval, and that's why Home Depot could do
what they did last year in saying, “By the way, Mr. Manufacturer, if
anybody tries to set up a Web site marketing directly, you're out of
our stores tomorrow.”It really sobers the mind when you think, “I know the
Internet is growing like crazy, but can I give up 80% of my sales
tomorrow?”It makes you pause.This is what's happening, and everybody in the world has been
playing this game.It's a fantastic game.Unfortunately, it didn't last 100 years; it probably lasted 20
to 30 years.